Cloud and AI Powering Next Wave of Earnings

Some investors are concerned about big tech companies ahead of Microsoft and Apple earnings as AI costs increase, but cloud might hold on to a silver lining.

Microsoft's Cloud Drives Growth

Microsoft's (MSFT) investment in ChatGPT shows the company's leadership in the field, but its AI segment underperformed for investors last quarter. Yet, AI has benefited Microsoft from the strong demand for its cloud computing platforms. There is intense competition in cloud between Microsoft Azure, AWS and Google Cloud, which will be scrutinised in Microsoft's upcoming earnings on Wednesday. Azure has become Microsoft's largest division, with analysts expecting revenue of $37.2 billion. So far this reporting season, major tech results have yet to meet high expectations, so investors will closely watch Microsoft to determine if it can break this trend.

Over the past year, Microsoft's share price increased nearly 30%, but earnings are forecast to rise only 14% to $3.10 per share compared to $2.73 last year. However, revenue is expected to keep pace with the share price, growing to $64.5 billion from $49.7 billion in the prior year. Microsoft will report its fiscal first quarter results. It may update full-year guidance, with investors hoping for at least a reiteration of the forecast for double-digit revenue and earnings growth. It should be noted that Microsoft raised its dividend in September.​

Apple: Returning to Fundamentals

Following the release of the AI-enabled iPhone 16, investors are now seeking tangible proof of device sales performance. Some analysts suggest the market is factoring in a more modest iPhone 16 cycle, citing mixed supply chain data ahead of the earnings results. As such, the company's commentary on sales progress of the new phone and forecast for sales leading up to the holiday season could be crucial to the market's reaction. The iPhone 16 has seen a softer reception than hoped, given ongoing high inflation and slow growth in China, with analysts predicting sales will increase 2.5% over the iPhone 15, with the implication that AI is not providing as much of a push for users to upgrade as had been anticipated.

Apple will report after the close on Thursday, traditionally seeing underperformance in its fiscal fourth quarter. The average analyst forecast is for earnings of $1.52 per share, up from $1.36 per share a year ago. Sales are projected to rise 13% over the past 12 months, reaching $94.8 billion. Attention could also focus on the company's services segment, which has recently outperformed in terms of growth. Still, the company's ability to maintain sales is a key topic analysts are discussing ahead of the earnings release.​

Earnings to Shed Light on MSFT

Microsoft's share price could reach $490 if the long-term measured movement upwards from $350 to $210 is realised. However, it remains unclear whether the medium-term formation will result in a head-and-shoulders (H&S) pattern indicating further downside toward $390 and $370 or in an expanding wedge expected to reach new highs above $470. This means Microsoft's share price fate lies within the $400-$440 range, with a break above increasing the likelihood of an expanding wedge and a drop below opening the possibility of falling to $350 as part of an orderly correction following a H&S pattern.​

Source: SpreadEx / Microsoft Corp

Key Takeaways

Earnings reports from major tech companies Microsoft and Apple will be scrutinised to determine if the tech sector can break the recent trend of results falling below high expectations.​ For Microsoft, investors will look at Azure cloud computing and whether it can drive continued growth. Analysts expect a 14% rise in earnings. Apple reports after releasing its AI-enabled iPhone 16, but it may see softer-than-expected sales growth of just 2.5% due to economic challenges. Its ability to grow services revenues will also be a key focus.